What is Free Cash Flow (FCF)?
Free Cash Flow (FCF) is the cash a company generates after paying for operating expenses, taxes, and capital expenditures (CapEx) needed to maintain or grow its asset base. FCF is the truest measure of a business’s cash-generating ability — unlike accounting profit (which includes non-cash charges), FCF represents actual cash available for distributions, debt service, acquisitions, or reinvestment.
FCF formulas
Unlevered FCF (UFCF):
UFCF = EBIT × (1 − Tax Rate) + D&A − Change in Working Capital − CapEx
Levered FCF (LFCF):
LFCF = UFCF − Interest Expense × (1 − Tax Rate)
Simple approximation:
FCF ≈ Net Cash from Operations − CapEx
FCF vs Net Income
| Dimension | Net Income | FCF |
|---|---|---|
| Includes D&A | Yes (non-cash) | No (added back) |
| Includes CapEx | No (only D&A) | Yes (real cash out) |
| Includes WC changes | No | Yes |
| Manipulation risk | High (accruals) | Lower (cash trail) |
FCF in SaaS
SaaS companies often emphasize FCF as a “Rule of 40” component because:
- Lower CapEx than traditional industries (no factories, fleets)
- Working capital release through annual prepaid contracts (positive WC impact)
- FCF margin can exceed GAAP operating margin substantially
Top-quartile SaaS at $100M+ ARR: 20-30% FCF margin
FCF valuation: DCF
Discounted Cash Flow (DCF) valuation projects future FCF and discounts back to present:
- Stage 1: Project explicit FCF for 5-10 years
- Stage 2: Terminal value (Gordon growth:
FCF × (1+g) / (WACC − g)) - Discount all to present using WACC
DCF is standard for mature businesses; less reliable for early-stage where FCF unpredictable.
FCF in private equity
PE firms model leveraged buyouts (LBOs) primarily on FCF capacity:
- Can target company service the debt from FCF?
- FCF in years 1-3 pays down acquisition debt
- FCF growth + multiple expansion drives equity returns
FCF red flags
- Net income positive + FCF negative: aggressive revenue recognition
- FCF growth funded by WC release (not sustainable)
- Heavy stock-based compensation (SBC) excluded — true cash to shareholders is lower
- One-time gains inflating reported FCF
Turkish context
Türk şirketler için FCF özellikle önemli — yüksek enflasyon + faiz ortamında nominal kazanç gerçek nakit üretimini yansıtmaz. Türk Lirası bazlı FCF’i USD’ye çevirirken döviz dalgalanması etkisi gözden geçirilmeli. Vergi öncesi vs vergi sonrası FCF ayrımı kritik (KV %25, geçici vergi farkı).
Practical implications for founders
FCF takip aylık yapılmalı. Series B+ aşamasında yatırımcılar “path to FCF positive” bekler. Public IPO yolundaki şirketler 4-8 çeyrek FCF pozitif track record ister. Vircon Legal yatırım turu yapılarında FCF benchmark + earn-out tasarımında danışmanlık verir.